Housing Sales and Mortgage Interest Rates

After three weeks of increases, mortgage interest rates took a dip this past week. Freddie Mac reports that 30 year, fixed-rate mortgages averaged 5.38%, during the week of June 18th. This is down from 5.59% the week prior.

The current rates are much lower than at this point last year when they reached 6.32%. And while the rates are higher than the low point seen in April, housing sales continue to climb. The return of home prices to sustainable levels has defused the up-tick in interest rates.

Perhaps the best example of the interplay between home prices and mortgage rates is the failure rate of mortgage loan modifications. Over the past 18 months, many loan providers have reworked borrowers adjustable rate mortgages to bring interest rates down to better levels.

Despite the significant decreases in interest rates through the modification process, a huge percentage of these borrowers still end up in default. See our blog posting on 12/23/2008. The reason is that the mortgage is still tied to a home price that was simply too high to sustain. This means that price becomes the most important factor to buyers.

Interest rates will rise and fall. Rates are not in the control of the buyer or seller. Setting price to match the market forces, however, is. Many factors influence a homes market value, including location, condition, economic landscape, supply of homes, and mortgage rates. As interest rates rise, fewer buyers will qualify for mortgages, which means that sellers will adjust price to match that lower level of demand.

In the end, if mortgages are based on a sustainable purchase prices buyers will be able to afford the home purchase regardless of the mortgage rates prevailing at the time. In our local market, the prices on many homes continue to provide that opportunity to home buyers and sellers.